There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Guizhou Chanhen Chemical's (SZSE:002895) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Guizhou Chanhen Chemical is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = CN¥981m ÷ (CN¥11b - CN¥3.0b) (Based on the trailing twelve months to June 2023).

So, Guizhou Chanhen Chemical has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 5.9% it's much better.

See our latest analysis for Guizhou Chanhen Chemical

In the above chart we have measured Guizhou Chanhen Chemical's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Guizhou Chanhen Chemical's ROCE Trend?

Investors would be pleased with what's happening at Guizhou Chanhen Chemical. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 298% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Guizhou Chanhen Chemical's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Guizhou Chanhen Chemical has. And with a respectable 58% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Guizhou Chanhen Chemical can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Guizhou Chanhen Chemical we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.